A variation on the viatical settlement scam has turned up: A recent federal district court recently considered the legality of stranger-initiated annuity transactions, or STATs and held that they were not illegal under relevant state insurance law that require that owners of life insurance contracts have an "insurable interest" in the insured. Essentially the scheme involved recruiting terminally-ill individuals as annuitants in variable annuities, speculative investing in the annuities' portfolios and then, upon the annuitants' death, taking advantage of the death benefits clause that allowed the owner to recover invested premiums, whatever the value of the portfolios. In short, risk-free speculative trading.

Two life insurance companies sued the attorney who put together the scheme and recruited the annuitants and the annuity brokerage firms (among others), seeking to rescind the transactions on grounds of fraud. The court, however, rejected plaintiffs' argument that the annuity contracts were life insurance contracts under the state law; they are different instruments, and the requirement of an "insurable interest" did not apply to annuities. The court did not dismiss the fraud claims, based on conspiracy to exploit a loophole in the annuity product, rejecting defendants' arguments that the insurance companies should have asked more questions about the relationship between the annuitants and the owners. Western Reserve Life. Assurance Co. of Ohio v. Concreal (LLC, D.R.I. June 2, 2010).